An Industry Reassessment

Robert S. Reichard, Economics Editor

Revised government production estimates reflecting new benchmark data confirm that the U.S. textile
and apparel industries haven't done all that badly over the past few years. In any event, it's now
quite clear that the huge demand declines noted over the recent economic recession are over. But
that's not to say that everything is coming up roses. For one, overall output has managed to recoup
only part of its big 2008-09 decline. Mills, for example, have retrieved only about one-third of
their losses — with downstream apparel makers lagging their pre-2008 levels by an even larger
percentage. Moreover, recent advances in textiles have tended to be selective rather than across
the board. Example: While production of basic mill products like fibers and fabrics have managed to
post a sizable 25-percent increase since its 2009 low point, the same can't be said of more highly
fabricated mill products like carpets and home furnishings, where the comparable advance is much
smaller.

On a somewhat rosier note, however, this scenario could change. It's now likely, for example,
that fabricated mill product recovery could accelerate a bit over the next few quarters, thanks to
a gradually improving construction outlook. Moreover, some near-term pickup in apparel sales may
also be in the cards — on a combination of lower consumer debt, slowly falling unemployment and
modestly rising incomes.

Improved Operating RatesCapacity utilization numbers — production as a percent of rated capacity — also have been
revised. And here, too, things seem to be looking better. According to the new estimates, some 70
percent of U.S. plant and equipment is currently being utilized. That's a fairly impressive
improvement over the 55-percent low point hit during the 2008-09 recession. And this upward climb
is expected to continue over the next few years. Credit two factors for this recent and expected
improvement: the numerator of the utilization fraction — production — has been creeping up, while
the denominator — capacity — has been declining. In fact, slippage in the latter number has been
quite dramatic. Thus, the U.S. textile mill machinery and equipment base has dropped a sizeable 14
to 15 percent since 2008 — or some 4 percent at annual rate. True, at first blush, such contraction
may not seem to be a plus. But zero in on the quality rather than the quantity of today's plant and
equipment, and the picture begins to look a lot different.

More to the point: The influx of new state-of-the-art facilities, while clearly not fully
replacing the shuttering of older, more obsolete ones, has made U.S. domestic mills a lot leaner
and meaner — and in the process, more competitive and quite profitable. More on the textile mill
earnings outlook next month, when new profit estimates become available.

A Changing Chinese RoleMeantime, some additional words on trade would also seem to be in order. Look to a few years
ahead, for example, and Chinese imports could be much less of a threat than they are now. At least,
that's what a new Boston Consulting Group (BCG) survey of more than 100 large U.S. manufacturers,
including some textile and apparel firms, seems to be suggesting. The key finding: China's position
as the default low-cost manufacturing base is beginning to erode — to the extent that more than
one-third of surveyed companies now either plan to or are actively considering bringing back some
of their Chinese production to the United States. Add in the fact that even today, those queried
feel Chinese sourcing is a lot more costly than it appears, and it's easy to see why BCG thinks
that Beijing could lose most of its cost advantage by as early as 2015. The principle reason, of
course, is souring Chinese labor costs, which BCG says are rising 15 to 25 percent per year. But
there are also other important factors pointing to changes in U.S. sourcing strategies — namely
product quality, proximity to customers, and ease of conducting business.

Equally significant, the consulting firm says a shift away from China could also have some
positive macroeconomic repercussions. Thus, less dependence on that nation, when combined with
increasing U.S. exports — due to increased competitiveness with other developed nations — could by
the end of the decade directly and indirectly create 2 million to 3 million American jobs, cut the
U.S. jobless rate by 1 to 2 percentage points, and lower the U.S. non-oil-related trade deficit by
25 to 35 percent. If true, the oft-repeated prediction of a stagnating U.S. economy seems grossly
overexaggerated.